IM gains traction on Wall Street

Some months ago I wrote a feature Securities trading desks adopt IM. It appeared that there was some push for adoption of this medium for transmitting securities orders in the US markets. However, there were a number of technical and regulatory compliance issues to be addressed before IM for transmission of securities orders could gain widespread acceptance.

The number of IM service providers for securities orders transmissions is increasing. "IM service providers are extending IM technology, once regarded as a purely recreational PC accessory, into critical enterprise and trading areas on Wall Street. Tools from the likes of AOL, Bloomberg, Google, Jabber, MSN, and Reuters are increasingly being integrated into day-to-day, mission-critical functions."

Some IM providers are technology companies; others are US broker dealers, who have developed specialist order transmission services for their end customers as well as to service other brokers and provide additional prime brokerage services to the hedge funds. Many of the IM services revolve around deployment of specialist trading applications using Google, MSN, and Yahoo! networks as well as what seems to have emerged as the principal IM platform provider, AOL Instant Messenger (AIM).

IM services now have developed a number of requisite features for transmitting orders. Certainly, IM obviates telephone orders and the attendant keying and re-keying of order information into brokers' trade order and management systems. Orders can be viewed all in one IM window, making order management more efficient and reducing its cost.

"IM trading with time-stamping and archiving capabilities for compliance can far outweigh other concerns. IM systems can be used for compliance with National Association of Securities Dealers' new order audit trail system (Oats) rules as a substitute for traditional order management system is it can result in cost savings. As a result orders are executed faster."

IM services can now translate orders into a FIX protocol message, routing them to brokers' order management systems, trading algorithms or Direct Market Access destinations for equities and options including NYSE, NASDAQ Stock Market venues, and major regional exchanges. IM securities transmission services now have the capability to create, view, amend, receive, and cancel trading order or execution reports. They provide order confirmations, audit trails, and customer information support in the same format. Equally, IM technology can be hosted and accessed via the internet without having to download software or install a server. It can even be used to distribute research to clients. Most customers of IM services continue to be sell-side firms, seeking to increase order flow via IM, which has the ability to reduce execution time by fractions of a second.

However, it should be noted that one of the areas where IM has increased in use is in servicing that increasingly anachronistic location - the floor of the New York Stock Exchange (NYSE) in the form of transmission of securities orders to the floor of the NYSE. The NYSE will be one of the last major exchanges to move upstairs, when it becomes electronic as part of its reverse take-over of Archipelago.

IM has clearly fulfilled a service requirement in handling order transmission flows to the floor of the NYSE on a cost efficient basis. When the NYSE becomes an electronic market (over the next two years?), will this have an impact on IM on Wall Street. Will the NYSE invest in order management systems, which will negate the benefits of IM as part of their proposition to enhance much required improvement in their service offerings?

While "instant messaging may be gaining traction on Wall Street", in the UK/Europe research shows there is technical progress in IM but that there continues to be "the traditional prejudices towards IM". Despite the hype over IM a number of technical, security, and regulatory compliance issues remain as challenges to its adoption. This is reinforced by the apparent high number of security threats and violations reported by one provider of IM security and management software.

For the financial regulators there remains the possibility that the trader may have access to another IM service, where messages are not recorded and archived. This could lead to so-called "front running of orders". The unlogged orders from the "alternative IM service" could be used to set the best price for the logged orders coming through the authorised and integrated system.

Nevertheless, as IM trading services have continued to proliferate, US financial services regulators cannot procrastinate much longer in making some formal statements on policy and practice if, as they have stated, "they remain unsettled about the use of IM services". Until they opine on the deployment of IM, regulatory and compliance risks rather than technology constraints will limit its adoption.